Why You Need to Write a Business Plan

From the Nolo eCommerce Center
Learn why writing a business plan is important – even if you’re not trying to raise money.

Just as a builder uses a blueprint to ensure that a building will be structurally sound, the process of creating and writing a “blueprint” for your business – called a business plan – will help you determine whether your business will be strong from the start. Without a business plan, you leave far too many things to chance.

A business plan contains a description of your business, including details about how it will operate, market research and marketing strategies, an evaluation of your main competitors and several financial forecasts.

Reasons to Create a Business Plan

Writing a well-thought-out and organized business plan dramatically increases your odds of succeeding as an entrepreneur. The benefits of a business plan include:

  • determining whether your business has a chance of making a good profit
  • providing an estimate of your start-up costs, and how much you’ll need to invest or finance
  • convincing investors and lenders to fund your business
  • providing a revenue estimate (by defining your market – who your customers will be – and the percentage of the market you can expect to reach)
  • helping your business make money from the start by devising a effective marketing strategy
  • helping you compete in the marketplace (through an analysis of what your competition lacks), and
  • anticipating potential problems so you can solve them before they become disasters.

If You Need to Raise Money

If you need to raise funds for your venture, it goes without saying that you’ll have to write a solid, formal business plan. Business owners who want to borrow money or attract investors will be successful only if they have well-written, well-researched business plans. All of your potential lenders or investors will want to understand as much as possible about how your business will work before deciding whether to back it financially.

The Importance of Financial Forecasts

Predicting and planning your business finances can show potential investors that your business idea will fly. But preparing financial forecasts is a good idea even if you don’t need to raise start-up money.

The discipline of developing financial projections for your business plan, including an estimate of start-up costs, a break-even analysis, a profit-and-loss forecast and a cash flow projection, will help you decide if your business is worth starting, or if you need to rethink some of your key assumptions. In other words, a good business plan will convince you that you’re doing the right thing – or not. As any experienced businessperson will tell you, the business you decide not to start because a financial projection doesn’t pencil out can be more important to your long-term success than the one you bet your economic future on.

To learn how to perform a break-even analysis – the first step in projecting your business finances – read Will Your Business Make Money?

Tempted to Skip the Financial Projections?

 Some people are intimidated by financial calculations and want to skip this process, hoping they’ll be one of the lucky few who “make it.” And some people are so enamored with their business concept and desperately eager to begin that they have no patience with the economic realities involved in their business. If you recognize either of these tendencies in yourself, it’s even more important that you prepare financial forecasts carefully – and pay attention to what they tell you. If you’re very stubborn, you may still try to sidestep financial planning by telling yourself that your financial estimates will be wildly off base and yield useless results. But if you do your best to make realistic predictions of expenses and revenues and accept that your guestimates will not be absolutely correct, you can learn a great deal about what the financial side of your business will look like in its early months and even years of operation. Even a somewhat inaccurate picture of your business’s likely finances will be much more helpful than having no picture at all.

For information on creating a business plan, see The Essentials of a Business Plan.

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